Press releases

Health of UK DB schemes now far stronger than pre-COVID-19 levels

12 May 2021

Full press release


DB schemes in the UK can expect to pay 98.2% of accrued pensions benefits

This marks the fourth consecutive quarter of improvement and is up nearly 7% from the market lows in March 2020

The health of the UK’s Defined Benefit (DB) pension schemes has continued to improve from the sharp decline experienced at the start of the pandemic and is now far stronger than even their pre-COVID levels, according to Legal & General Investment Management (LGIM).

LGIM's Health Tracker, a monitor of the current health of UK DB pension schemes, found that the average1 DB scheme can expect to pay 98.2% of accrued pension benefits as of 31 March 2021, up 6.8% from 31 March 20202.

The health of the UK’s DB pension schemes has also shown a 1.1% improvement quarter on quarter against the funding level of 97.1% at 31 December 2020³. This latest improvement means LGIM’s measure has shown a continuing improvement in each of the last four quarters.

However, it is important to note that these figures may yet still understate the negative impact of the pandemic, due to a weakening of covenants that many schemes will have endured.

John Southall, Head of Solutions Research at LGIM: "The first quarter of 2021 was yet another good period for our Expected Proportion of Benefits Met (EPBM) measure of scheme health, with the ratio rising by 1.1% from 97.1% at 31 December 2020 to 98.2% at 31 March 2021. The change was largely driven by a rapid rise in nominal interest rates, the sharpest three month increase seen in years, benefitting schemes that haven’t fully hedged their interest rate risk.

These benefits were partially offset by a rise in expected inflation (increasing inflation-linked liabilities) but growth assets also posted a strong quarter, boosting asset values. One notable feature of our EPBM measure is that it cannot exceed 100%. As the EPBM figure edges closer to 100%, continued positive experience for schemes has a smaller marginal impact on our measure.

From a covenant perspective we chose to retain a typical sponsor rating assumption of BB in our calculations as confidence in the recovery improves. Whilst the long-term impact of the pandemic remains unclear, fiscal and monetary actions have been extremely supportive. We noted that if a rating of B was assumed, the EPBM figure at 31 March 2021 would be around 1.1% lower."

Christopher Jeffery, Head of Rates and Inflation Strategy at LGIM: "The global reflation trade played out in force during the first quarter. The consensus continued to mark up its 2021 growth outlook on the back of fiscal stimulus and the vaccine roll-out. US Treasury yields rose more in Q1 than any quarter since 2016 Q4. There are clear parallels with that episode: a sharp move higher in US sovereign funding costs driven by political transition that dragged up yields everywhere.

Risk assets remained immune to that reset in discount rates with equity markets supported by a stronger earnings backdrop, and credit markets enjoying abnormally low default rates. There are a few hints of inflation concern entering the market narrative with breakeven inflation and commodities moving higher since the turn of the year. The fate of inflation as economies around the world reopen will make or break the market dynamic over the rest of the year."

  1. Based on the Purple Book from the Pension Protection Fund, a typical pension scheme holds approximately 20% in equities, 70% in bonds/LDI, 5% in property and 5% in other assets.  For illustration, we assume rates and inflation hedge ratios of 70% of liabilities on a gilts basis (revised upwards from previous assumptions) and no future accrual or deficit contributions.
  2. As of 31 March 2020, the LGIM DB Health Tracker found that pension schemes could expect to pay 91.4% of accrued pension benefits.
  3. As of 31 December 2020, the LGIM DB Health Tracker found that pension schemes could expect to pay 97.1% of accrued pension benefits.

Further information

Notes to editors

Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with £1.2 trillion in total assets under management1 of which 40% is international. We have a unique and highly synergistic business model, which continues to drive strong returns. Legal & General provides powerful asset origination and management capabilities directly to clients, which also underpin our leading retirement and protection solutions. We are a leading international player in Pension Risk Transfer, in UK and US life insurance, and in UK workplace pensions and retirement income. Our purpose is to improve the lives of our customers and create value for our shareholders. Through inclusive capitalism, we are investing in long-term assets, such as real estate and infrastructure, that can help build a better society for the future.

1Data as at 31 December 2023.

LGIM is one of Europe’s largest asset managers and a major global investor, with total assets under management of £1.2 trillion1 ($1.5tn, €1.3tn, CHF 1.2tn). We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.

For more than 50 years, we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property, and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.

1Data as at 31 December 2023. Data combines assets under management by LGIM in the UK, LGIMA in the US and LGIM Asia in Hong Kong. Assets under management include securities and derivatives positions.